Survey by DEMIRE & bulwiengesa on Germany's Office Real Estate Market: Second-Tier Cities Combine Higher Returns with Lower Risks when Compared to the Metropolises

• Bonn, Dortmund, Koblenz and Essen show most favourable risk-return ratios
• Net initial yields in second-tier cities outperform the Class A cities by 1.0 to 3.8 percentage points
• Low propensity to relocate among office tenants in second-tier cities
• Reduced risk of market upheavals in second-tier cities

Langen, 19 April 2018 - The company DEMIRE Deutsche Mittelstand Real Estate AG and the bulwiengesa research institute published their second comprehensive survey, "Office Real Estate Market: Investment Opportunities in Secondary Locations." The survey compares 31 selected second-tier cities in Germany with the country's so-called "Big Seven" cities. The second-tier cities examined offer higher return potentials than the seven Class A cities. At the same time, they boast a greater stability of income. The elevated return potential manifests itself most conspicuously in higher net initial yields. The bracket of net initial yields in second-tier cities extends from 4.1% in Bonn to 7.0% in Stralsund and Chemnitz. In the Class A cities, by contrast, net initial yields are 3.2 percent on average. The higher stability of income in most of the second-tier cities is also reflected in a lower rent volatility: The markets of Bonn and Dortmund, for instance, are characterised by a very low spread of rents. This reduces the threat of market-driven corrections in rents. Conversely, big cities such as Berlin and Munich show serious fluctuations in their rent averages.

The survey places the return potentials (net initial yields) and earnings risk (volatility of office rents) of the examined cities in relation to each other. The findings identified the most favourable relations in the cities Bonn, Dortmund, Koblenz and Essen. By contrast, the Class A cities Berlin, Munich and Hamburg-but Leipzig as well-placed at the very bottom of the list. Only one Class A city, Düsseldorf, made the top ten in terms of risk-return ratio.

"Due to the better chances for returns in second-tier cities and the absence of investment opportunities in the Class A cities, market players are increasingly committing themselves in second-tier cities. Last year, approximately 27.5 billion euros were invested outside the metropolises, thereof approximately 15 billion euros in all of the second-tier cities," commented Sven Carstensen, head of the Frankfurt branch of bulwiengesa AG. "While rising demand will push the net initial yields in the secondary locations down to historic lows as well, the yield spread between these markets and the Class A cities is still considerable at 2 percentage points."

Low Propensity to Relocate among Office Tenants in Second-Tier Cities
The survey also studied the relation of the office take-up to a given city's total office stock. If the take-up is high compared to the stock, the fact indicates a strong propensity among local office tenants to relocate. The sentiment is much more pronounced in the Class A markets than in the secondary locations. "The survey findings also confirm our first-hand experiences in the market," commented Ralf Kind, CEO of DEMIRE AG. "We benefit from a strong tenant loyalty in our properties. The tenancy in second-tier cities is dominated by mid-market companies, and these tend to remain loyal to their respective place of business."

New Office Completions: Reduced Risk of Market Upheavals in Second-Tier Cities
Speculative building activity may cause increased vacancy levels in times of slowing demand. Unlike in the Class A markets, where the share of unlet floor area approximates 40 percent at the start of a given project, new developments in secondary locations are generally aligned with demand, i.e. they are realised with a high pre-let ratio. It is a good way to reduce the risk of market upheavals as a result of excess supply.

All things considered, the construction activity in many second-tier cities nonetheless outpaces the metropolises, relatively speaking. This is suggested by a comparison of new completions with the total floor space stock. Since new schemes in second-tier cities rarely represent speculative construction, they reflect an actual increase in demand that is generated by local companies. Ingolstadt is a particularly good case in point. Out of the city's present office stock, 24 percent is ten years old or younger. Other second-tier cities with a high share of new buildings include Ulm (14 percent), Darmstadt (14 percent) and Kempten (13 percent). The proportion of new-build property in the Class A cities averages ten percent only. In terms of absolute new-build figures, the highest completion rates were registered in the second-tier cities Essen, Bremen, Dortmund, Münster, Bonn and Mannheim.

The complete study can be downloaded from http://www.demire.ag/en/property/research


 
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Contact Details
DEMIRE Deutsche Mittelstand Real Estate AG
Robert-Bosch-Strasse 11
D-63225 Langen
Phone: +49 (0) 6103 - 372 49 - 0
Fax: +49 (0) 6103 - 372 49 - 11
ir@demire.ag
www.demire.ag
_______________________________________

About DEMIRE Deutsche Mittelstand Real Estate AG
DEMIRE - First in Secondary Locations
DEMIRE Deutsche Mittelstand Real Estate AG has commercial real estate holdings in mid-sized cities and up-and-coming locations bordering German metropolitan areas. As of September 30, 2017, DEMIRE held real estate with a value of approx. EUR 1 billion. As of the reporting date, annualised contractual rents had been firmly agreed upon in the amount of circa EUR 72 million for an average term of 4.8 years.
 
DEMIRE Deutsche Mittelstand Real Estate AG shares (ISIN: DE000A0XFSF0) are listed in the Prime Standard segment of the Frankfurt Stock Exchange.
 
About bulwiengesa
bulwiengesa is one of the major, independent real estate industry analysis companies in continental Europe. For over 30 years, bulwiengesa has supported its partners and clients in questions of real estate and location and market analysis, including with sound data services, strategic advice and bespoke surveys, analyses and valuations. Meaningful individual data, time series, forecasts and transaction data are supplied by the information system RIWIS online. Users of the data from bulwiengesa include the Deutsche Bundesbank for the ECB, BIS and OECD.